Re: [Marxism] PEMEX looks to lock in current oil prices

["Joaquin Bustelo" <jbustelo@xxxxxxxxx>]

Sartesian  replies to my post about PEMEX with his usual intellectual rigor:

"NOTHING (to use the all caps JB enjoys deploying) in the futures markets
requires PRODUCTION or PRODUCERS.   NOTHING in the futures markets requires
production or delivery of oil upon settlement date.  Pemex, or any other
trader, has to appear in the market with one thing only, or the promise of
one thing, MONEY"

Discovering that PEMEX can perfectly well trade in oil futures as a
speculator, in addition to, or instead of, hedging as a producer is an
intellectual achievement that ranks up there somewhere between discovering
that 1+1=2 and 2+2=4. Like, duh....

However, the subject at hand was PEMEX's alleged use of the future markets
for hedging against a decline in price, and the claim made in an article
from cnn.com that this reflected expectations of a downward price trend in
the market. In doing such hedging, PEMEX would clearly be acting to protect
itself as an oil producer. That is what the article claimed. That is what I
was discussing.

On Sartesian's more general point that "NOTHING (to use the all caps JB
enjoys deploying) in the futures markets requires PRODUCTION or PRODUCERS,"
that's simply silly. That may be true of an individual trader or a great
many traders, BUT NOT OF THE MARKET AS A WHOLE.

Futures markets are derivative markets. Derivative from what? From the real
market in actual physical commodities. It is true that someone trading in,
for example, the New York Mercantile Exchange light sweet crude futures
contracts doesn't HAVE to make or take physical delivery, but by maintaining
an open long or short position, they CAN carry out the physical transaction,
so to all intents and purposes, Tuesday's closing price (when the August
contract expired) became a spot price for the physical product. And what
determines this spot price in the last analysis is the physical, real supply
and demand [it is, of course, like any market, subject to manipulation,
misinformation and so on -- there is nothing religiously infallible about
markets].

The August futures contract expiration is why there was such a flurry of
activity and price drops at the end of last week and beginning of this one,
as speculative traders betting on higher prices liquidated open August
positions, putting a downward pressure on prices. That is ALSO why there was
relatively little speculation-driven price change reported in connection
with Hurricane Dolly, even though it forced the shutdown of some Gulf
production. The only price you generally hear about is the near-month
contract, the one next to expire, which on Tuesday was August and then
became the September contract on Wednesday. There was next to no time left
in the August contract to unwind any speculative positions ("bets") that
might have been taken on Dolly's effect on prices, so people didn't bet on
that.

Most of the very detailed and specific NYMEX rules for the Light Sweet Crude
Oil Futures Contract are concerned with the actual, physical product.
Subjects addressed include what crudes qualify as "Light Sweet Crude Oil"
and automatic price adjustments between slightly different types (Nigerian
Bonny Light and Qua Iboe carry a 15 cent a barrel premium; Norwegian Oseberg
Blend a 55 cent discount), where, when and how it is delivered (FOB,
Cushing, Oklahoma, on or after the first of the month but before the end of
the month), payment procedures for delivery, inspection of the product,
allowable shortages or overages (2%), and even the exact temperature at
which volume will be measured (60 degrees Fahrenheit).

This emphasizes that, while for many traders engaged in purely speculative
activity "oil" in merely notional, the foundation of the market, what it is
built on, is a REAL market for an actual, physical, product.

Joaquin


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